18.

The Auditor’s Report

References:
• PSA 220, Quality Control for an Audit of Financial Statements
• PSA 260, Communication with Those Charged with Governance
• PSA 265, Communicating Deficiencies in Internal Control to Those Charged with Governance and
Management
• PSA 450, Evaluation of Misstatements Identified during the Audit
• PSA 500, Audit Evidence
• PSA 700, Forming an Opinion and Reporting on the Financial Statements
• PSA 701, Communicating Key Audit Matters in the Independent Auditor’s Report
• PSA 705, Modifications to the Opinion in the Independent Auditor’s Report
• PSA 706, Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent
Auditor’s Report
• PSA 710, Comparative Information—Corresponding Figures and Comparative Financial Statements
• PSA 720, The Auditor’s Responsibilities Relating to Other Information in Documents Containing
Audited Financial Statements
LECTURE NOTES
Introduction
At the end of the audit, the auditor shall:
1. Form an opinion on the financial statements (financial statements) based on the conclusions drawn
from the audit evidence obtained; and
2. Express clearly that opinion through a written report.

Forming the Auditor’s Opinion

1. Unmodified (unqualified) opinion—The opinion expressed when the financial statements are
prepared, in all material respects, in accordance with the applicable financial reporting framework.
2. Modified opinion—The three types of are:
• Qualified opinion—the auditor is satisfied that the financial statements are presented fairly, except
for a specific aspect of them.
• Adverse opinion—the auditor does not believe the financial statements are fairly presented.
• Disclaimer of opinion—the auditor does not know if the financial statements are presented fairly.

Pervasive effects or possible effects on the financial statements are those that, in the auditor’s
judgment:
1. Are not confined to specific elements, accounts or items of the financial statements;
2. If so confined, represent or could represent a substantial proportion of the financial statements; or
3. In relation to disclosures, are fundamental to users’ understanding of the financial statements.

Evaluating Audit Evidence

Based on the audit procedures performed and the audit evidence obtained, the auditor shall evaluate,
before the conclusion of the audit whether the assessments of the risks of material misstatement at
the assertion level remain appropriate. The sufficiency and appropriateness of audit evidence
obtained primarily depend on the auditor’s professional judgment.

Evaluating Misstatements
Misstatement is a difference between the amount, classification, presentation, or disclosure of a
reported financial statement item and the amount, classification, presentation, or disclosure that is
required for the item to be in accordance with the applicable financial reporting framework.
Misstatements can arise from error or fraud. Misstatements may be identified at any stage of the
audit. Misstatements may result from:
• An inaccuracy in gathering or processing data from which the financial statements are prepared
• An omission of an amount or disclosure
• An incorrect accounting estimate arising from overlooking or clear misinterpretation of facts
• Judgments of management concerning accounting estimates that the auditor considers
unreasonable or the selection and application of accounting policies that the auditor considers
inappropriate.

Types of Misstatements
• Factual misstatements are misstatements about which there is no doubt.
• Judgmental misstatements are differences arising from the judgments of management concerning
accounting estimates that the auditor considers unreasonable, or the selection or application of
accounting policies that the auditor considers inappropriate.
• Projected misstatements are the auditor’s best estimate of misstatements in populations, involving
the projection of misstatements identified in audit samples to the entire population from which the
samples were drawn.
• Uncorrected misstatements Any misstatements (except those clearly trivial) that the auditors find
should be corrected; otherwise, they cannot issue an unqualified opinion on the financial statements.
Unrecorded misstatements are combined as total likely misstatement in the financial statements and
considered.

Forming the Auditor’s Reports

The auditor’s report shall be in writing (hard copy format or an electronic medium). The auditor’s may
be an unmodified report or a modified report, depending upon the results of the audit.

Unmodified Auditor’s Report

With the exception of the Opinion and Basis for Opinion sections, PSA 700 does not establish
requirements for ordering the elements of the auditor’s report. However, it requires the use of specific
headings, which are intended to assist in making auditor’s reports more recognizable. The elements
of unmodified auditor’s report are:
Unmodified Auditor’s Report – Elements
1. Title
2. Addressee
3. Report on the Audit of the Financial Statements - Omitted if no Other Reporting Responsibilities
4. Opinion
5. Basis for Opinion
6. Material Uncertainty Related to Going Concern (If applicable)
7. Key Audit Matters (KAP) (if applicable e.g., Listed entities)
8. Other Information (if applicable)
9. Responsibilities of Management and Those Charge With Governance for the Financial Statements
10. Auditor's Responsibilities for the Audits of Financial Statements
11. Other Reporting Responsibilities (ORR) - If applicable
12. Name of the Engagement Partner (Required only for listed entities)
13. Signature of the auditor
14. Auditor's address
15. Date of Auditor's Report

Title
• Clearly indicates report of an independent auditor.
• Distinguishes this report from reports issued by others.
• Signifies compliance with independence requirements.

Addressee
• Addressed based on engagement’s circumstances.
• Normally those for whom the report is prepared, often either to the shareholders or to TCWG.

Report on the Audit of the Financial Statements

• Serves as the sub-title.
• Used to separate other reporting responsibilities.

Opinion
The first section of the auditor’s report, which also:
a. Identify the entity whose financial statements have been audited;
b. State that the financial statements have been audited;
c. Identify the title of each statement comprising the financial statements;
d. Refer to the notes, including the summary of significant accounting policies; and
e. Specify the date of, or period covered by, each financial statements comprising the financial
statements
Basis for Opinion
a. States that the audit was conducted based on PSAs;
b. Refers to the section of the auditor’s report that describes the auditor’s responsibilities under the
PSAs;
c. Includes a statement that the auditor is independent of the entity in accordance with the relevant
ethical requirements relating to the audit, and has fulfilled the auditor’s other ethical responsibilities in
accordance with these requirements; and
d. States whether the auditor believes that the audit evidence the auditor has obtained is sufficient
and appropriate to provide a basis for the auditor’s opinion.

Material Uncertainty Related to Going Concern (GC)

• Applicable if the auditor considers a material uncertainty related to going concern exists.
Example:
Material Uncertainty Related to Going Concern
We draw attention to Note X in the financial statements, which indicates that the Company incurred a
net loss of (amount) during the year ended December 31, 20X1 and, as of that date, the Company’s
current liabilities exceeded its total assets by (amount). As stated in Note X, these events or
conditions, along with other matters as set forth in Note X, indicate that a material uncertainty exists
that may cast significant doubt on the Company’s ability to continue as a going concern. Our opinion
is not modified in respect of this matter.

Key Audit Matters (KAM)

• Applicable to audit of listed entities, or where required by law or regulation.
• KAM refer to matters that, in the auditor’s professional judgement, are most significant to the audit.
• Auditor is required to include each KAM unless (1) law or regulation precludes disclosure, or (2) in
extremely rare circumstances, the auditor determines that the matter should not be communicated
when adverse consequences of communicating the KAM would reasonably be expected to outweigh
the public interest benefits of such communication.
• KAM is prohibited for a disclaimer of opinion, but required for a qualified or adverse opinion.
• In certain limited circumstances, there may be no KAM to be communicated. The auditor’s report
includes a statement to that effect.
Example:
Revenue Recognition
The amount of revenue and profit recognized in the year on the sale of [name of product] and
aftermarket services is dependent on the appropriate assessment of whether or not each long-term
aftermarket contract for services is linked to or separate from the contract for sale of [name of
product]. As the commercial arrangements can be complex, significant judgment is applied in
selecting the accounting basis in each case. In our view, revenue recognition is significant to our audit
as the Company might inappropriately account for sales of [name of product] and long-term service
agreements as a single arrangement for accounting purposes and this would usually lead to revenue
and profit being recognized too early because the margin in the long-term service agreement is
usually higher than the margin in the [name of product] sale agreement.

Our audit procedures to address the risk of material misstatement relating to revenue recognition,
which was considered to be a significant risk, included:
• Testing of controls, assisted by our own IT specialists, including, among others, those over: input of
individual advertising campaigns’ terms and pricing; comparison of those terms and pricing data
against the related overarching contracts with advertising agencies; and linkage to viewer data; and
• Detailed analysis of revenue and the timing of its recognition based on expectations derived from
our industry knowledge and external market data, following up variances from our expectations.

Other Information
• For the audit of listed entities or any other entity where the auditor has obtained other information,
an ‘Other information’ section should be included in the auditor’s report. This section should include:
• a statement that management is responsible for the other information
• an identification of the other information obtained before the date of the auditor’s report (for listed
entities, also the other information expected to be obtained after the date of the auditor’s report)
• a statement that the auditor’s opinion does not cover the other information
• a description of the auditor’s responsibilities for reading, considering and reporting on other
information, and
• where other information has been obtained, either a statement that the auditor has nothing to report,
or a description of any uncorrected material misstatement
(See “Auditor’s Report—Other Information Included in an Entity’s Annual Report” below for further
discussion.)

Responsibilities of MGT and TCWG for the Financial Statements

This part of the report describes the responsibilities of those who are responsible for the preparation
of the financial statements. This section should describe management's responsibility including the
following:
• The preparation of the financial statements.
• The implementation of internal control necessary to enable the preparation of financial statements
that are free from material misstatement, whether due to error or fraud.
• The assessment of the entity’s ability to continue as a going concern, the appropriateness of the
going concern.

Auditor’s Responsibilities for the Audit of the Financial Statements

The report must state that:
• the auditor’s objectives are to obtain reasonable assurance whether the financial statements as a
whole are free from material misstatement, and to issue an auditor’s report that includes the auditor’s
opinion; and
• reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in
accordance with the PSAs will always detect a material misstatement when it exists.
The report must also:
• explain that misstatements can arise from fraud or error
• describe the meaning of materiality
• explain that the auditor exercises professional judgement and maintains professional skepticism
throughout the audit
• describe the auditor’s responsibilities in an audit.

The description of the auditor’s responsibilities must either be set out in the body of the auditor’s
report, in an appendix to the auditor’s report or by including a specific reference in the body of the
auditor’s report to such a description on the website of an appropriate authority, where this is
permitted by law and regulation.

Other Reporting Responsibilities (ORR)

If the auditor is required by law to report on any other matters, this must be done in an additional
paragraph titled “Report on other legal and regulatory requirements’ or otherwise as appropriate.
(See “Auditor’s Report—Supplementary Information
Presented with Financial Statements” below for further discussion.)

Name of the Engagement Partner and Signature of the Auditor

The name of the engagement partner should be identified, unless such a disclosure is reasonably
expected to lead to a significant personal security threat. The report must contain the auditor's
signature, whether this is the auditor's own name or the audit firm's name or both.
In the Philippines, Securities Regulation Code (SRC) Rule 68 requires that the auditor’s report on
financial statements filed with the Securities and Exchange Commission (SEC), which will likewise be
filed with the Bureau of Internal Revenue (BIR), be manually signed. In case of an auditing firm, the
certifying partner shall sign his/her own signature and shall indicate that he/she is signing for the firm,
the name of which is also indicated in the report. The auditor is also required to state the signing
accountant’s license number, Tax Identification No. (TIN), Privilege Tax Receipt (PTR) No.,
registration number with the PRC/BOA, and accreditation issued by the SEC.

Auditor’s Address
The auditor’s report shall name the location in the jurisdiction where the auditor practices.

Date of the Auditor’s Report

The report must be dated no earlier than the date sufficient appropriate audit evidence was obtained
on which to base the auditor's opinion on the financial statements.
Modified Auditor’s Report
There are two ways in which the auditor’s report may be modified: (1) modifying the auditor’s opinion
and (2) including Emphasis of Matter and Other Matter paragraph without necessarily modifying the
auditor’s opinion.
Modified Auditor’s Report—Modified Opinion
The auditor modifies the following sections of the auditor’s report in case a modified opinion is
expressed:
1. Auditor’s opinion;
2. Basis for opinion;
3. Description of auditor’s responsibilities, in case of disclaimer of opinion; and
4. Omission of KAM, in case of disclaimer of opinion.

Auditor’s Opinion
When the auditor modifies the audit opinion, the auditor shall use the heading “Qualified Opinion,”
“Adverse Opinion,” or “Disclaimer of Opinion,” as appropriate, for the Opinion section, such as:

Qualified Opinion
Wordings are the same with unmodified opinion but with additional phrase, as follows: “…except for
the effects of the matter described in the Basis for
Qualified Opinion section of our report…”
When the auditor expresses a qualified opinion, it would not be appropriate to use phrases such as
“with the foregoing explanation” or “subject to” in the Opinion section as these are not sufficiently
clear or forceful.

Adverse Opinion
“In our opinion, because of the significance of the matter discussed in the Basis for Adverse Opinion
section of our report, the accompanying financial statements do not present fairly…”

Disclaimer of Opinion
“We do not express an opinion on the accompanying financial statements of the Company. Because
of the significance of the matter described in the Basis for Disclaimer of Opinion section of our report,
we have not been able to obtain sufficient and appropriate audit evidence to provide a basis for an
audit opinion on these consolidated financial statements.”

Basis for Opinion

When the auditor modifies the opinion on the financial statements, the auditor shall, in addition to the
specific elements of the unmodified report:
1. Amend the heading “Basis for Opinion” to “Basis for Qualified Opinion,” “Basis for Adverse
Opinion,” or “Basis for Disclaimer of Opinion,” as appropriate; and
2. Within this section, include a description of the matter giving rise to the modification.

Examples of are given below:

Qualified Opinion
The company's inventories are carried in the statement of financial position at xxx. Management has
not stated inventories at the lower of cost and net realizable value but has stated them solely at cost,
which constitutes a departure from PFRSs. The company's records indicate that, had management
stated the inventories at the lower of cost and net realizable value, an amount of xxx would have
been required to write the inventories down to their net realizable value. Accordingly, cost of sales
would have been increased by xxx, and income tax, net income and shareholders' equity would have
been reduced by xxx, xxx and xxx, respectively.

Adverse Opinion
As explained in Note X, the Group has not consolidated subsidiary XYZ Company that the Group
acquired during 20X1 because it has not yet been able to determine the fair values of certain of the
subsidiary’s material assets and liabilities at the acquisition date. This investment is therefore
accounted for on a cost basis. Under PFRSs, the Company should have consolidated this subsidiary.
Had XYZ Company been consolidated, many elements in the accompanying consolidated financial
statements would have been materially affected. The effects on the consolidated financial statements
of the failure to consolidate have not been determined.
Disclaimer of Opinion
We were not appointed as auditors of the company until after December 31, 20X1 and thus did not
observe the counting of physical inventories at the beginning and end of the year. We were unable to
satisfy ourselves by alternative means concerning the inventory quantities held at December 31,
20X0 and 20X1 which are stated in the statement of financial position at xxx and xxx, respectively. In
addition, the introduction of a new computerized accounts receivable system in September 20X1
resulted in numerous errors in accounts receivable. As of the date of our audit report, management
was still in the process of rectifying the system deficiencies and correcting the errors. We were unable
to confirm or verify by alternative means accounts receivable included in the statement of financial
position at a total amount of xxx as at December 31, 20X1. As a result of these matters, we were
unable to determine whether any adjustments might have been found necessary in respect of
recorded or unrecorded inventories and accounts receivable, and the elements making up the
statement of profit or loss, statement of changes in equity and cash flow statement.

Description of Auditor’s Responsibilities, In Case of Disclaimer of Opinion

Include only the following:
1. A statement that the auditor’s responsibility is to conduct an audit of the entity’s financial
statements in accordance with PSAs and to issue an auditor’s report;
2. A statement that, however, because of the matter(s) described in the Basis for Disclaimer of
Opinion section, the auditor was not able to obtain sufficient appropriate audit evidence to provide a
basis for an audit opinion on the financial statements; and
3. The statement about auditor independence and other ethical responsibilities.

Omission of KAM, In Case of Disclaimer of Opinion

Unless required by law or regulation, when the auditor disclaims an opinion on the financial
statements, the auditor’s report shall not include a KAM.

Modified Auditor’s Report—Emphasis of Matter (EOM) and Other Matter (OM)

The placement of an EOM paragraph or OM paragraph in the auditor’s report depends on (1) the
nature of the information to be communicated, and (2) the auditor’s judgment as to the relative
significance of such information to intended users compared to other elements required to be
reported.

Emphasis of Matter (EOM)

EOM refers to a paragraph included in the auditor’s report that refers to a matter appropriately
presented or disclosed in the financial statements that, in the auditor’s judgment, is of such
importance that it is fundamental to users’ understanding of the financial statements.

Including an EOM in the auditor’s report is appropriate provided the auditor would not be required to
(1) modify the opinion as a result of the matter, and (2) the matter has not been determined to be a
KAM.

EOM paragraphs are no longer used in relation to going concern. Instead the auditor now uses a
“Material uncertainty” paragraph.

When the auditor includes an EOM paragraph in the auditor’s report, the auditor shall:
1. Include the paragraph within a separate section of the auditor’s report with an appropriate heading
that includes the term “Emphasis of Matter”;
2. Include in the paragraph a clear reference to the matter being emphasized and to where relevant
disclosures that fully describe the matter can be found in the financial statements. The paragraph
shall refer only to information presented or disclosed in the financial statements; and
3. Indicate that the auditor’s opinion is not modified in respect of the matter emphasized.

An example is given below.

Emphasis of Matter – Effects of Fire
We draw attention to Note X of the financial statements, which describes the effects of a fire in the
Company’s production facilities. Our opinion is not modified in respect of this matter.
Other Matter (OM)
OM refers to a paragraph included in the auditor’s report that refers to a matter other than those
presented or disclosed in the financial statements that, in the auditor’s judgment, is relevant to
users’ understanding of the audit, the auditor’s responsibilities or the auditor’s report.

Including OM in the auditor’s report is appropriate provided the auditor (1) is not prohibited by law or
regulation, and (2) the matter has not been determined to be a KAM. When the auditor includes an
OM paragraph in the auditor’s report, the auditor shall include the paragraph within a separate section
with the heading “Other Matter,” or other appropriate heading. An example of an OM is:

Other Matter
The financial statements of ABC Company for the year ended December 31, 20X0, were audited by
another auditor who expressed an unmodified opinion on those statements on March 31, 20X1.

Auditor’s Report—Other Information Included in an Entity’s Annual Report

Other information refers to financial or non-financial information (other than financial statements and
the auditor’s report thereon) included in an entity’s annual report. Examples of other information
include the following:
• A report by MGT or TCWG on operations
• Financial summaries or highlights
• Employment data
• Planned capital expenditures
• Financial ratios
• Names of officers and directors
• Selected quarterly data

The auditor shall read the other information to identity material inconsistencies with the audited
financial statements. If a material inconsistency is identified, the auditor shall determine whether the
audited financial statements or other information is misstated.

If the financial statements are materially misstated but management refuses to correct the
misstatement, the auditor shall modify the audit opinion.

If the other information is materially misstated and needs to be revised but management refuses, the
auditor shall communicate this matter to TCWG and:
• Include an Other information section in the auditor's report that describes the material inconsistency,
or
• Withdraw from the engagement (where this is legally permitted).

Misstatement of the other information exists when the other information is incorrectly stated or
otherwise misleading. For example, omission of a key performance indicator used by management
could indicate that the other information is misleading.

Auditor’s Report—Supplementary Information Presented with the financial statements

Supplementary information refers to information that is presented together with the financial
statements that is not required by the applicable financial reporting framework used to prepare the
financial statements, normally presented in either (1) supplementary schedules or as (2) additional
notes. The auditor’s reporting responsibilities depend on whether or not supplementary information is
considered integral part of the financial statements, as discussed below.

Integral Part of the Financial Statements

The supplementary information shall be covered by the auditor’s opinion. The auditor’s opinion would
also cover notes or supplementary schedules that are cross-referenced from the financial statements.
An example is given below.

Report on the Supplementary Information Required Under Revenue Regulations 15-2010

Our audit was conducted for the purpose of forming an opinion on the basic financial statements
taken as a whole. The supplementary information required under Revenue Regulations 15-2010 in
[Note XX] to the financial statements is presented for purposes of filing with the Bureau of Internal
Revenue and is not part of the basic financial statements. Such information is the responsibility of
management of [Name of Client]. The information has been subjected to the auditing procedures
applied in our audit of the basic financial statements. In our opinion, the information is fairly stated, in
all material respects, in relation to the basic financial statements taken as a whole.

Not Integral Part of the Financial Statements

Evaluate whether such supplementary information is presented in a way that sufficiently and clearly
differentiates it from the audited financial statements. One way of differentiating unaudited
supplementary information is by labeling it as “unaudited.” If management refuses to do so, the
auditor shall identify the unaudited supplementary information and explain in the auditor’s report that
such supplementary information has not been audited. This identification may most likely be done as
part of Other Matter (OM) paragraph or in other sections of auditor’s report, as may be judged
appropriate by the auditor.

Auditor’s Report—Comparative Information

The two types of comparative information are:
1. Corresponding figures—comparative information where amounts and other disclosures for the prior
period are included as an integral part of the current period financial statements, and are intended to
be read only in relation to the amounts and other disclosures relating to the current period (referred to
as “current period figures”). The level of detail presented in the corresponding amounts and
disclosures is dictated primarily by its relevance to the current period figures; and

2. Comparative Financial Statements—comparative information where amounts and other disclosures

for the prior period are included for comparison with the financial statements of the current period but,
if audited, are referred to in the auditor’s opinion. The level of information included in those
comparative financial statements is comparable with that of the financial statements of the current
period. PAS 1, Presentation of Financial Statements, requires this approach. The auditor shall update
the previously expressed opinion on the comparative financial statements.

In case that the prior period financial statements were unaudited or audited by a predecessor auditor,
the auditor shall state (if not prohibited) in an Other Matter paragraph in the auditor’s report:
• That the financial statements of the prior period were audited by the predecessor auditor;
• The type of opinion expressed and, if the opinion was modified, the reasons therefore; and
• The date of that report.

An example of Other Matter of that is given below.

Other Matter
The financial statements of the Company for the year ended December 31, 20X0, were audited by
another auditor who expressed an unmodified opinion on those statements on March 31, 20X1.